Author: Ashton Wenborn

Putin’s rules of attraction

Posted on by Ashton Wenborn

Russian President Vladimir Putin’s covert aggression in Ukraine continues – and so do Western sanctions against his country. But the economy is not all that is under threat; Russia’s soft power is dwindling, with potentially devastating results.

A country can compel others to advance its interests in three main ways: through coercion, payment, or attraction. Putin has tried coercion – and been met with increasingly tough sanctions. German Chancellor Angela Merkel, Putin’s main European interlocutor, has been expressing her frustration with Russian policy toward Ukraine in increasingly harsh terms. Whatever short-term gains Putin’s actions in Ukraine provide will be more than offset in the long term, as Russia loses access to the Western technology it needs to modernize its industry and extend energy exploration into frontier Arctic regions.

Russia’s soft power is dwindling, with potentially devastating results

With Russia’s economy faltering, Putin is finding it increasingly difficult to employ the second tool of power: payment. Not even oil and gas, Russia’s most valuable resources, can save the economy, as Putin’s recent agreement to supply gas to China for 30 years at knockdown prices demonstrates.

This leaves attraction – a more potent source of power than one might expect. China, for example, has been attempting to use soft power to cultivate a less threatening image – one that it hopes will undermine, and even discourage, the coalitions that have been emerging to counterbalance its rising economic and military might.

A country’s soft power rests on three main resources: an appealing culture, political values that it reliably upholds, and foreign policy that is imbued with moral authority. The challenge lies in combining these resources with hard-power assets like economic and military power so that they reinforce one another.

The United States failed to strike this balance with respect to its 2003 invasion of Iraq. While America’s military power was sufficient to defeat Saddam Hussein’s forces quickly, it did so at the expense of its attractiveness in many countries. Likewise, though establishing a Confucius Institute in Manila to teach Filipino people about Chinese culture may help to cultivate China’s soft power, its impact will be severely constrained if China is simultaneously using its hard power to bully the Philippines in the territorial dispute over the Scarborough Shoal.

The problem for Russia is that it already has very little soft power with which to work. Indeed, as the political analyst Sergei Karaganov noted in 2009, Russia’s lack of soft power is precisely what is driving it to behave aggressively – such as in its war with Georgia the previous year.

To be sure, Russia has historically enjoyed considerable soft power, with its culture having made major contributions to art, music, and literature. Moreover, in the immediate aftermath of World War II, the Soviet Union was attractive to many Western Europeans, owing largely to its leadership in the fight against fascism.

But the Soviets squandered these soft-power gains by invading Hungary in 1956 and Czechoslovakia in 1968. By 1989, they had little soft power left. The Berlin Wall did not collapse under a barrage of NATO artillery, but under the impact of hammers and bulldozers wielded by people who had changed their minds about Soviet ideology.

Putin is now making the same mistake as his Soviet forebears. Despite his 2013 declaration that Russia should be focusing on the “literate use” of soft power, he failed to capitalize on the soft-power boost afforded to Russia by hosting the 2014 Winter Olympic Games in Sochi.

Instead, even as the Games were proceeding, Putin launched a semi-covert military intervention in Ukraine, which, together with his talk of Russian nationalism, has induced severe anxiety, particularly among ex-Soviet countries. This has undermined Putin’s own stated objective of establishing a Russia-led Eurasian Union to compete with the European Union.

With few foreigners watching Russian films, and only one Russian university ranked in the global top 100, Russia has few options for regaining its appeal. So Putin has turned to propaganda.

Last year, Putin reorganised the RIA Novosti news agency, firing 40% of its staff, including its relatively independent management. The agency’s new leader, Dmitry Kiselyov, announced in November the creation of “Sputnik,” a government-funded network of news hubs in 34 countries, with 1,000 staff members producing radio, social media, and news-wire content in local languages.

But one of the paradoxes of soft power is that propaganda is often counterproductive, owing to its lack of credibility. During the Cold War, open cultural exchanges – such as the Salzburg Seminar, which enabled young people to engage with one another – demonstrated that contact among populations is far more meaningful.

Today, much of America’s soft power is produced not by the government, but by civil society – including universities, foundations, and pop culture. Indeed, America’s uncensored civil society, and its willingness to criticize its political leaders, enables the country to preserve soft power even when other countries disagree with its government’s actions.

Similarly, in the United Kingdom, the BBC retains its credibility because it can bite the government hand that feeds it. Yet Putin remains bent on curtailing the role of non-governmental organisations and civil society.

Putin may understand that hard and soft power reinforce each other, but he remains seemingly incapable of applying that understanding to policy. As a result, Russia’s capacity to attract others, if not to coerce and pay them, will continue to decline.

Joseph S. Nye, Jr.is Chairman of the WEF’s Global Agenda Council on the Future of Government

© Project Syndicate 1995–2014

The return of currency wars

Posted on by Ashton Wenborn

The recent decision by the Bank of Japan to increase the scope of its quantitative easing is a signal that another round of currency wars may be under way. The BOJ’s effort to weaken the yen is a beggar-thy-neighbor approach that is inducing policy reactions throughout Asia and around the world.

Central banks in China, South Korea, Taiwan, Singapore, and Thailand, fearful of losing competitiveness relative to Japan, are easing their own monetary policies – or will soon ease more. The European Central Bank and the central banks of Switzerland, Sweden, Norway, and a few Central European countries are likely to embrace quantitative easing or use other unconventional policies to prevent their currencies from appreciating.

All of this will lead to a strengthening of the US dollar, as growth in the United States is picking up and the Federal Reserve has signaled that it will begin raising interest rates next year. But, if global growth remains weak and the dollar becomes too strong, even the Fed may decide to raise interest rates later and more slowly to avoid excessive dollar appreciation.

The cause of the latest currency turmoil is clear: In an environment of private and public deleveraging from high debts, monetary policy has become the only available tool to boost demand and growth. Fiscal austerity has exacerbated the impact of deleveraging by exerting a direct and indirect drag on growth. Lower public spending reduces aggregate demand, while declining transfers and higher taxes reduce disposable income and thus private consumption.

Countries that were overspending, under-saving, and running current-account deficits have been forced by markets to spend less and save more

In the eurozone, a sudden stop of capital flows to the periphery and the fiscal restraints imposed, with Germany’s backing, by the European Union, the International Monetary Fund, and the ECB have been a massive impediment to growth. In Japan, an excessively front-loaded consumption-tax increase killed the recovery achieved this year. In the US, a budget sequester and other tax and spending policies led to a sharp fiscal drag in 2012-2014. And in the United Kingdom, self-imposed fiscal consolidation weakened growth until this year.

Globally, the asymmetric adjustment of creditor and debtor economies has exacerbated this recessionary and deflationary spiral. Countries that were overspending, under-saving, and running current-account deficits have been forced by markets to spend less and save more. Not surprisingly, their trade deficits have been shrinking. But most countries that were over-saving and under-spending have not saved less and spent more; their current-account surpluses have been growing, aggravating the weakness of global demand and thus undermining growth.

As fiscal austerity and asymmetric adjustment have taken their toll on economic performance, monetary policy has borne the burden of supporting faltering growth via weaker currencies and higher net exports. But the resulting currency wars are partly a zero-sum game: If one currency is weaker, another currency must be stronger; and if one country’s trade balance improves, another’s must worsen.

Of course, monetary easing is not purely zero-sum. Easing can boost growth by lifting asset prices (equities and housing), reducing private and public borrowing costs, and limiting the risk of a fall in actual and expected inflation. Given fiscal drag and private deleveraging, lack of sufficient monetary easing in recent years would have led to double and triple dip recession (as occurred, for example, in the eurozone).

But the overall policy mix has been sub-optimal, with too much front-loaded fiscal consolidation and too much unconventional monetary policy (which has become less effective over time). A better approach in advanced economies would have comprised less fiscal consolidation in the short run and more investment in productive infrastructure, combined with a more credible commitment to medium- and long-term fiscal adjustment – and less aggressive monetary easing.

You can lead a horse to liquidity, but you can’t make it drink. In a world where private aggregate demand is weak and unconventional monetary policy eventually becomes like pushing on a string, the case for slower fiscal consolidation and productive public infrastructure spending is compelling.

Such spending offers returns that are certainly higher than the low interest rates that most advanced economies face today, and infrastructure needs are massive in both advanced and emerging economies (with the exception of China, which has overinvested in infrastructure). Moreover, public investment works on both the demand and supply sides. It not only boosts aggregate demand directly; it also expands potential output by increasing the stock of productivity-boosting capital.

Unfortunately, the political economy of austerity has led to sub-optimal outcomes. In a fiscal crunch, the first spending cuts hit productive public investments, because governments prefer to protect current – and often inefficient – spending on public-sector jobs and transfer payments to the private sector. As a result, the global recovery remains anemic in most advanced economies (with the partial exception of the US and the UK) and now also in the major emerging countries, where growth has slowed sharply in the last two years.

The right policies – less fiscal austerity in the short run, more public investment spending, and less reliance on monetary easing – are the opposite of those that have been pursued by the world’s major economies. No wonder global growth keeps on disappointing. In a sense, we are all Japanese now.

Nouriel Roubini is Chairman of Roubini Global Economics and Professor of Economics at NYU’s Stern School of Business.

© Project Syndicate 1995–2014

2015: the year of sustainable development

Posted on by Ashton Wenborn

The year 2015 will be our generation’s greatest opportunity to move the world toward sustainable development. Three high-level negotiations between July and December can reshape the global development agenda, and give an important push to vital changes in the workings of the global economy. With United Nations Secretary-General Ban Ki-moon’s call to action in his report The Path to Dignity, the Year of Sustainable Development has begun.

In July 2015, world leaders will meet in Addis Ababa, Ethiopia, to chart reforms of the global financial system. In September 2015, they will meet again to approve Sustainable Development Goals (SDGs) to guide national and global policies to 2030. And in December 2015, leaders will assemble in Paris to adopt a global agreement to head off the growing dangers of human-induced climate change.

The fundamental goal of these summits is to put the world on a course toward sustainable development

The fundamental goal of these summits is to put the world on a course toward sustainable development, or inclusive and sustainable growth. This means growth that raises average living standards; benefits society across the income distribution, rather than just the rich; and protects, rather than wrecks, the natural environment.

The world economy is reasonably good at achieving economic growth, but it fails to ensure that prosperity is equitably shared and environmentally sustainable. The reason is simple: The world’s largest companies relentlessly – and rather successfully – pursue their own profits, all too often at the expense of economic fairness and the environment.

Profit maximization does not guarantee a reasonable distribution of income or a safe planet. On the contrary, the global economy is leaving vast numbers of people behind, including in the richest countries, while planet Earth itself is under unprecedented threat, owing to human-caused climate change, pollution, water depletion, and the extinction of countless species.

The SDGs are premised on the need for rapid far-reaching change. As John F. Kennedy put it a half-century ago: “By defining our goal more clearly, by making it seem more manageable and less remote, we can help all people to see it, to draw hope from it, and to move irresistibly toward it.” This is, in essence, Ban’s message to the UN member states: Let us define the SDGs clearly, and thereby inspire citizens, businesses, governments, scientists, and civil society around the world to move toward them.

The main objectives of the SDGs have already been agreed. A committee of the UN General Assembly identified 17 target areas, including the eradication of extreme poverty, ensuring education and health for all, and fighting human-induced climate change. The General Assembly as a whole has spoken in favor of these priorities. The key remaining step is to turn them into a workable set of goals. When the SDGs were first proposed in 2012, the UN’s member said that they “should be action-oriented,” “easy to communicate,” and “limited in number,” with many governments favoring a total of perhaps 10-12 goals encompassing the 17 priority areas.

Achieving the SDGs will require deep reform of the global financial system, the key purpose of July’s Conference on Financing for Development. Resources need to be channeled away from armed conflict, tax loopholes for the rich, and wasteful outlays on new oil, gas, and coal development toward priorities such as health, education, and low-carbon energy, as well as stronger efforts to combat corruption and capital flight.

The July summit will seek to elicit from the world’s governments a commitment to allocate more funds to social needs. It will also identify better ways to ensure that development aid reaches the poor, taking lessons from successful programs such as the Global Fund to Fight AIDS, Tuberculosis, and Malaria. One such innovation should be a new Global Fund for Education, to ensure that children everywhere can afford to attend school at least through the secondary level. We also need better ways to channel private money toward sustainable infrastructure, such as wind and solar power.

These goals are within reach. Indeed, they are the only way for us to stop wasting trillions of dollars on financial bubbles, useless wars, and environmentally destructive forms of energy.

Success in July and September will give momentum to the decisive climate-change negotiations in Paris next December. Debate over human-induced global warming has been seemingly endless. In the 22 years since the world signed the UN Framework Convention on Climate Change at the Rio Earth Summit, there has been far too little progress toward real action. As a result, 2014 is now likely to be the warmest year in recorded history, a year that has also brought devastating droughts, floods, high-impact storms, and heat waves.

Back in 2009 and 2010, the world’s governments agreed to keep the rise in global temperature to below 2° Celsius relative to the pre-industrial era. Yet warming is currently on course to reach 4-6 degrees by the end of the century – high enough to devastate global food production and dramatically increase the frequency of extreme weather events.

To stay below the two-degree limit, the world’s governments must embrace a core concept: “deep decarbonization” of the world’s energy system. That means a decisive shift from carbon-emitting energy sources like coal, oil, and gas, toward wind, solar, nuclear, and hydroelectric power, as well as the adoption of carbon capture and storage technologies when fossil fuels continue to be used. Dirty high-carbon energy must give way to clean low- and zero-carbon energy, and all energy must be used much more efficiently.

A successful climate agreement next December should reaffirm the two-degree cap on warming; include national “decarbonization” commitments up to 2030 and deep-decarbonization “pathways” (or plans) up to 2050; launch a massive global effort by both governments and businesses to improve the operating performance of low-carbon energy technologies; and provide large-scale and reliable financial help to poorer countries as they face climate challenges. The United States, China, the European Union’s members, and other countries are already signaling their intention to move in the right direction.

The SDGs can create a path toward economic development that is technologically advanced, socially fair, and environmentally sustainable. Agreements at next year’s three summits will not guarantee the success of sustainable development, but they can certainly orient the global economy in the right direction. The chance will not come along again in our generation.

Jeffrey D. Sachs is Professor of Sustainable Development, Professor of Health Policy and Management, and Director of the Earth Institute at Columbia University. He is also Special Adviser to the United Nations Secretary-General on the Millennium Development Goals.

© Project Syndicate 1995–2014

Outrageous predictions 2015: ‘I still see Germany reaching recession, and pretty soon’

Posted on by Ashton Wenborn

Cocoa prices going through the roof and internet armageddon. Could that be where we’re headed in 2015? According to Saxo Bank’s annual outrageous predictions, they’re certainly possibilities worth considering. World Finance speaks to Steen Jakobsen, Saxo Bank’s Chief Executive, to find out more.

World Finance: Well Steen, there is a reason your predictions are called ‘outrageous’ – how much of a success rate have you had with them? What have you successfully predicted?
Steen Jakobsen: We don’t set out to do 10 calls that become right. We are setting out to say, these are 10 things that will upset you. But the ratio is we get two, two and a half calls right every year. But not always necessarily in the following year! But 20-25 percent of our calls become over the next 24 months, in the last 12 years, correct.

World Finance: Why do you compile this list each year if they’re so unlikely to happen?
Steen Jakobsen: We have in today’s markets so much consensus – I receive research from my brilliant colleagues at 25 institutions, I would not be able to tell you the difference between any of the 25. We are so one-sided, we have only one instrument we can buy: equities.

So we are saying simply, ‘Why don’t we just ask the question, what can go wrong with this?’ To have a negative prediction, but a positive or constructive discussion on why or why not an idea should happen. I actually want you to say to me: it is very very unlikely to happen.

Maybe the world is so outrageous and always surprising that it’s impossible to make an outrageous call!

The funny thing is, what people hate the most about the outrageous predictions, the one they hate the most, is the most likely to happen.

World Finance: Now Steen, a number of your predictions actually don’t seem that outrageous at all: UKIP for example is doing surprisingly well, and cocoa demand is already outweighing supply. So are you playing it a bit safe this year?
Steen Jakobsen: Maybe the world is so outrageous and always surprising that it’s impossible to make an outrageous call!

Of course, some of these calls are likely. I mean, I think you’re underestimating for instance the volcano activity in Iceland. If that happens it will have a material impact, not only on agriculture prices, but unfortunately, it will probably take the summer away from your personally.

The cocoa call is probably the least controversial here; but again, a 100 percent increase is still 100 percent, right?

World Finance: Looking at your 2015 predictions in more detail now, and why do you think China will devalue the Yuan? Why is 2015 the year for this?
Steen Jakobsen: Because their capital balance is negative if you take away the amount of dollars they’ve borrowed.

The Chinese have become the single biggest issuer of dollar debt. As dollar is increasingly strong, it puts a heavy burden on their ability to repay into a context where they are moving from nominal growth to quality growth, China is basically going from 10 percent to 2.5, 3 percent growth over the next 10 years, into an environment where they have no ability to do what a planned economy’s supposed to do: to create jobs.

The only lever left is the one that everybody else is using, and of course their main enemy always being Japan, that will be the one they want to focus on, they will move their currency significantly higher to rebalance their capital account and to create the jobs needed in a planned economy.

World Finance: Well last year you mentioned oil prices, and this year you haven’t made any predictions. Why is this?
Steen Jakobsen: We totally know that having got the oil call right last year will make it impossible for us to make a call on oil. And if we had made an oil call this year, people would have thought it was our forecast. So I like the fact we are getting a lot of credit for calling the oil market right, but it was an outrageous call! It wasn’t necessarily our forecast.

So, it would be a total waste of time for us to predict what will happen next year.

I think, personally, that the contango shows you the market is yet to re-price the full impact of low energy. The contango is $8 between January oil next year, and 17. That needs to come down to two to three when this is over. But I will be buying oil before I sell it.

I would say that Japanese inflation going to five percent is very unlikely

World Finance: You’re also fairly negative in 2014’s predictions about Germany, and the country hasn’t had a great year, and has been called the ‘sick man of Europe.’ So who do you think will be the ‘sick man of Europe’ for 2015?
Steen Jakobsen: France and Germany again. But I have good news for you: I think that the second half of next year will be the first time since the introduction of the euro where the Club Med, the peripheral countries, will be more competitive in labour costs than Germany. I think eastern Europe – certainly Poland and other countries – will contribute to a more brave, bold pace, better economic growth scenario for all of Europe.

So I still see Germany reaching recession, and pretty soon. I mean, they’re already there – they’re 0.1 of a percentage point in the last quarter away from a true recession. But the point is that Europe is changing. And that is the whole point of all these calls.

People need to understand, over the next two to three years, Europe will be stronger in southern Europe than in northern Europe, simply because we had no reforms; no reforms led to an internal devaluation in the wages and disposable income in southern Europe. Now if you want to open a factory, I would advise you go to Portugal. Great infrastructure, great people, and extremely cheap living and labour costs.

World Finance: What would you say is the most outrageous prediction you’ve made for 2015?
Steen Jakobsen: I would say that Japanese inflation going to five percent is very unlikely. But on the other hand, why would believe if they get a little bit of, if they get inflation is only going to be two percent, I think if inflation comes back to Japan it will not be two percent, it will probably not even be five. It will probably be seven or eight.

The fact that you can issue and use bazookas I think as the economists call it. It is the most imprecise weapon in the arsenal of the military, and so is their monetary policy.

World Finance: Finally, what would the economic landscape look like if all your predictions proved true?
Steen Jakobsen: Like 2008! In 2008 I think it was the best year we ever had. I think we had eight or nine out of 10 right. And we were not celebrating, by the way, the fact we had so many right.

But you know, if it’s a real bummer year. And maybe you should apply also the rule of seven. 2015 is seven years away from 2008, 2007 is seven years away from 2000. Maybe the most outrageous call is that the world is so simple, every seven years we have a crisis.

Hatten Group’s bold move sees it soar higher in Malaysia

Posted on by Ashton Wenborn

Melaka is known as the ‘Historical State’ in Malaysia. The town, located to the south east of Kuala Lumpur’s towering skyscrapers, has been a UNESCO World Heritage Site since 2008, because of its 16th century colonial fortifications, churches and buildings. Today it is a popular tourist destination, and one that Hatten Group, Malaysia’s fastest growing property developer, took a chance on.

Back in 2004 Hatten Group was still a budding property developer, eager to establish itself in a competitive market. That is why it decided to take on an abandoned development located in the heart of Melaka, a high-potential, yet untapped market. As a flagship venture, many were sceptical about this bold move. But it paid off.

The project, known as Dataran Pahlawan Melaka Megamall (DPMM), is the largest global retail destination in the region, measuring an astounding two million square feet with an average of 11 million visitors every year. As the first developer to recognise the potential in Melaka’s property and commercial-tourism industry, Hatten Group is now widely acclaimed for its pioneering philosophy and innovative quality standards.

DPMM in numbers

750

Retail lots

11m

Visitors per year

2004

Year opened

With over 750 retail lots, DPMM is the most diverse shopping destination in the region, but it is its mesmerising historic features that truly set the development apart. The group wanted to ensure that it made the most of what is now Melaka’s UNESCO World Heritage Site.

“DPMM is designed to preserve the historic ‘Padang Pahlawan’ while cultural features are tastefully incorporated into the design of the mall,” says Colin Tan, Group Managing Director of the Hatten Group.

Sustainable ventures
Following the success of DPMM, Hatten Group has grown to dominate Melaka’s retail arena with an ever-expanding portfolio of retail projects. Hatten Square Suites and Shoppes, launched in 2011, offer over 200 retail lots, including the first H&M, MST Golf and Braun Buffel flagship megastores in Melaka.

“By the end of 2014, Hatten Group will have completed yet another outstanding development, Terminal Pahlawan,” says Tan. “This mixed retail project incorporates four floors of vibrant retail with an international coach bay, a travel hub and a boutique hotel. Featuring the first indoor ‘Baba Nyonya Heritage Street’ themed shopping experience, Terminal Pahlawan is set to conquer the local commercial tourism industry.”

As the Hatten Group continues its meteoric rise to the top of the Malaysian property development market, Tan insists that all this success is due to the group’s commitment to more than just quality construction and unique designs.

“Hatten Group ensures the viability of its projects with an outstanding leasing team that has brought in some of the most coveted brands to Melaka. With a central management in place to control the operations of all retail developments, Hatten’s high-standards are consistent and efficiency is increased for higher profitability on investments.”

Future projects
Recently, the Hatten Group has chosen to ensure it is offering the best possible services by incorporating a brand management division that will take responsibility for securing the licensing for international brand franchising. To date, the team has successfully secured famous Hong Kong labels SEMK and Pacific Coffee.

“More excitingly, the team is set to launch Hatten Group’s very own ‘Teddie Bear’ brand in Elements Mall,” says Tan. “The first of its kind in Malaysia, the Teddie Bear themed floors in Elements Mall will feature the first Teddie Bear Museum, children’s theme park and a luxury Teddie Bear themed hotel. According to plan, Hatten Group will successfully incorporate eight more international franchises under its brand management sector within the next five years.”

Hatten Group has expertly developed its retail development business over the years, and is now reaping the rewards of such hard work, and will continue to do so into the near future. “By 2025, Hatten Group will have developed over five million square feet of retail space, managing over 5,000 hotel rooms and offer over 5,000 residential units, effecting major commercial-economic control over south-western Malaysia,” says Tan.

The company now has a considerable amount of projects across Malaysia. These include the Capital 21 development at Capital City, which has transformed the Iskandar Johor region with world-themed floors that feature 21 famous cities. There is also the Unicity development that offers shopping, dining and ‘edutainment’ next to a bustling university campus.

With these goals firmly in sight, the group will secure its base in the booming state of Melaka, Malaysia, as the sole largest retail and property developer, as well as hotelier, in the city. Hatten Group will be the catalyst, the main entry point for international brands, businesses and corporations looking to capitalise on Melaka’s highly profitable economy. And from this distinctive base, it grows and develops as a leading Malaysian property behemoth.

Oil and gas in 2015 will be survival of the richest

Posted on by Ashton Wenborn

In recent years, key oil producers across the globe have been churning out black gold at such a rate that prices have fallen to near unmanageable extremes. And though most consumers would hardly bat an eyelid at a new sub-60 asking price, the sacrifice, in terms of failed projects, could number in the hundreds of billions of dollars.

On December 10, the price of oil fell to a new five-year low of little over $64, in step with reports of a bloated global supply and the decline of the OPEC oil cartel. What’s more, global demand is shrinking and the price of crude alone has buckled by over 40 percent in five months; circumstances that have forced affected parties to rethink their strategies and shy away from ambitious projects. Put another way, 2015 will be the year in which last year’s break-even oil projects will die a death.

According to data compiled by Rystad Energy, $150bn in oil and gas projects will be shelved in 2015, as companies struggle to adapt to a climate much-changed from that of 12 months ago. ConocoPhillips, for example, announced in December that it would be trimming 20 percent from its 2015 budget, and several major players aside have reduced their budgets by similar, if not greater, degrees. In the six-month lead-up to December, ConocoPhillips’ share price suffered a 16 percent slip, and the decision to hold fire on future plans shows how much rock bottom prices have impacted even the industry’s leading names.

2015 will be the year in which last year’s break-even oil projects will die a death

What’s important for oil companies in surviving the slump is on which side of the supply dilemma OPEC will fall. It’s clear that the organisation has – and still is – guilty of mass overproduction, and, without cutting supply, the price of oil will continue to slide. However, whereas reducing supply would bring increased revenues for member nations, doing so could afford the US a larger slice of the pie, which bloc is clearly unwilling to relinquish. “Without any adjustments to supply, oil inventories would implicitly build by an average 1.8 million barrels per day until 2020, which in reality is impossible,” says Bjørnar Tonhaugen, VP of Oil and Gas Markets at Rystad Energy. “Markets must adjust.”

With OPEC nations choosing to plough on with unsustainable levels of production, any smaller operations will be priced out of the market, whereas major names will find themselves hard pressed to meet soaring development costs. The worry for oil companies is that the price per barrel is set to reach a lowly $50 in 2015, which will test the viability of unconventional extraction methods and the willingness to invest in uncertain finds.

As opposed to the oil industry of years passed, where major names have pumped often-colossal sums of money into production, only those with the deepest pockets will survive 2015 – and with very little in the way of development to show for it. As volatile price shifts and overproduction push margins to breaking point, the winners will be those with money in the bank and those that can produce on the cheap.

Russia’s unsustainable currency fix

Posted on by Ashton Wenborn

The Russian public were treated to an all-too-familiar news item on December 16 after the rouble sank to yet another record low. Hit by a deadly combination of harsh sanctions and sinking oil prices, the 75-against-the-dollar rate has capped a dismal year for a currency that has shed almost 50 percent of its value against the dollar.

After locals dumped $20bn in 2014 and international investors are due to pull another $240bn in this and the coming year, the outlook for the currency is hazy at best. Even more worrying, however, is that the record low came after the central bank’s mammoth 6.5 percent interest rate hike. At 17 percent, the bank’s exorbitant benchmark rate shows just how hard policymakers are working to steady the currency’s slide. And with annual consumer price growth running at over twice the bank’s four percent target and inflation fast approaching unmanageable extremes, the country has been left with no option but to offload its foreign currency reserves to reduce the damage.

The bank’s exorbitant benchmark rate shows just how hard policymakers are working to steady the currency’s slide

The central bank revealed on December 12 that it had, two days earlier, intervened with $200m worth of reserves, adding to the $348m it had already committed on December 9 and the previous week’s total of $4.5bn. And while the $5bn-plus blowout means that the rouble’s losses have been slightly less, the policy shows the short-sightedness with which the central bank is attempting to stem the decline.

In the aftermath of the 2008 crash, the central bank all but crippled the economy after shelling out $200bn in foreign currency reserves, and, years earlier, the bank was forced to abandon ship after spending $10bn in the lead up to a 1998 default. Clearly, the lessons learned in years passed have been forgotten insofar as currency interventions are concerned, and authorities must now take care to avoid any repeat mistakes.

A cursory glance at Russia’s shrinking reserves shows exactly how costly the interventions have proven thus far, and with oil prices at record lows and western sanctions hurting trade, replenishing the account will be no easy task. Worryingly, foreign currency reserves have fallen by over 20 percent since the summer of 2013, and without a buoyant oil trade to pick up the slack, more intervention could expose the country to losses on multiple fronts.

The country’s central bank has said on numerous occasions that it will allow the rouble to float freely at the turn of the year, though promises made in recent months to take a step back have come to nothing. When the central bank said in November that it would turn tail on a 15-year policy of unlimited intervention and interfere only in the event of a crisis, it took the institution less than a month to dip into its reserves.

Record low oil prices will bring turmoil the rouble’s way in the months ahead, as they will do for any number of oil currencies, but allowing the currency to float freely will give a clearer indication of its true market value and protect against any more speculative attacks.

It’s clear that turning away from the bank’s interfering ways will trigger currency losses in the short-term, though plugging the hole with reserves runs the risk of exasperating the issue further still. The timing of the bank’s new loose touch policy is less than ideal and the institution cannot idly stand by while the country teeters on the brink of recession. Still, the central bank’s go-to response is too reactive, and for the institution to ward off any lasting damage it must first rise above the temptation to hold the currency at any one rate and instead let markets dictate the price.

Bank of Russia raises interest rate to 17 percent

Posted on by Ashton Wenborn

The Russian central bank has opted to hike its benchmark interest rate to 17 percent, up from 10.5 percent previously, to stem the currency’s decline and restore a measure of stability to its stumbling economy. Sparked in large part by plunging oil prices and, to a lesser extent, western sanctions, the bank will be hoping that the increased rate will bring a greater number of investors to the fold.

The bank will be hoping that the increased rate will bring a greater number of investors to the fold

The increase of 6.5 percent, effective December 16, proves that the country’s central monetary authority is committed to protecting its currency; even it means emergency action must be taken. “This decision is aimed at limiting substantially increased ruble depreciation risks and inflation risks,” said the central bank in a brief statement. An interest rate spike of a single percentage point failed to impress on December 11, which left the Bank of Russia with no option but to take drastic action a week down the line.

The bank has so far spent over $70bn this year and over $6bn in the past month protecting the rouble, and to little avail, with the currency’s exchange rate against the dollar having fallen close to 50 percent since December last year. It appears that the rate rise has worked, at least in the short-term, as the currency’s value against the dollar moved to 58, from 67 previously, on hearing of the move. However, the decision to raise interest rates comes accompanied with its fair share of risks, namely slower growth.

The central bank will be looking first and foremost to ward off the risk of deflation and stop any more investors from pulling their money from Russia. Still, the country is not yet out of the woods, and a weak outlook for oil prices will continue to pile pressure on what is an oil-dependent currency.

Rupiah falls to lowest level in 16 years

Posted on by Ashton Wenborn

The rupiah dropped 1.9 percent against the dollar in Jakarta to 12,698, according to Bloomberg, indicating a 16-year low and marking the biggest fall since the start of August. It’s down 10 percent from its rate against the dollar in July.

The Indonesian currency is feeling the effects of a stronger dollar, which has been boosted in anticipation of the Federal Reserve’s likely decision to raise interest rates in the US in 2015. 

The rising interest rates next year could mean further bad news for Indonesia

The rupiah has been further weakened by local firms buying dollars to pay back foreign loans and a slump in holiday trading, the FT reports.

“Year-end dollar demand from local corporations as well as flows related to recent selling of bonds seem to be weighing on the currency,” Shigehisa Shiroki of Mizuho Bank in Tokyo told Bloomberg. 10.09trn rupiah ($795m) in foreign investment was withdrawn in early December, the site reports.

Indonesia was already dealt a blow in 2013 when investors began withdrawing money from the country following the Fed’s warning that it would start to pull back from its aggressive quantitative easing policy. The rising interest rates next year could mean further bad news for Indonesia – largely reliant on overseas investment – as more funds are pulled.

“The impact on the bond and equity markets and the real economy will be negative,” Standard Chartered economist Fuazi Ichsan told the FT, adding that Indonesia’s central bank must either “intervene more aggressively in the foreign exchange market and shrink its reserves” or increase the overnight deposit rate, which currenty lies at 5.75 percent. Lending rates have been risen to 7.75 percent.

President of Indonesia, Joko Widodo, is set to reduce subsidies for fuel, which were boosted by over 30 percent earlier in the year. It’s hoped Widodo will bring in other economic reforms to boost the economy and protect it from a further battering.

CWG uses technology to empower MSMEs in Nigeria

Posted on by Ashton Wenborn

The promotion and development of a structured and efficient micro, small and medium enterprises (MSME) sector in Nigeria has been considered a key focus by the government in recent years, in the hopes that this will further enhance sustainable economic development in the country. One of the key protagonists for the resuscitation and growth of such MSMEs is the Computer Warehouse Group (CWG).

The firm provides ‘software-as-a-service’ to customers through cloud computing, which is becoming increasingly important as a facilitator for growth. The initiative was specifically designed to empower MSMEs to take advantage of technology to grow their businesses and is tagged CWG2.0. Nigeria is one of the fastest growing economies in the continent and has a sizeable, yet largely unemployed, population. The idea of CWG2.0 is to enable each of the 17.7 million MSMEs in Nigeria to build sufficient capacity to add at least one more employee. By doing so, the firm is helping to foster inclusive growth by creating an additional 17 million jobs.

Strong growth
Smaller enterprises are globally acknowledged as the oil required to lubricate the engine of socio-economic transformation of any nation. The MSME sector is strategically positioned to absorb up to 80 percent of jobs, improve per capita income, increase value addition to raw materials supply, improve export earnings and step up capacity utilisation in key industries. Such enterprises are also important in other key sectors, including agriculture, mining and quarrying, building and construction and manufacturing, and therefore have strong linkages with the entire range of economic activities in a country such as Nigeria.

“The uptake of our premier cloud product for microfinance banks in Ghana, after a successful launch in Nigeria with MTN, proves that our emerging business model of providing cloud services on a subscription basis for SMEs tagged CWG 2.0 is scalable, repeatable and transferable, as it is relatively more sustainable and profitable,” says Founder and CEO of the Computer Warehouse Group, Austin Okere.

“We could inadvertently create 17.7 million additional jobs, enough to absorb all the 16 million unemployed youths with a generous surplus to spare. While this may seem like a dream where reality is far-fetched, it is precisely what CWG2.0 is all about; the freedom to dream and the passion to execute. CWG2.0 defines the future direction of our company. It is a social impact investment initiative directed towards empowering the African Entrepreneur,” says Okere.

Largest economy
Last year marked a significant milestone for CWG as the firm listed its shares on the Nigerian Stock Exchange, lifting the exchange by about NGN14bn ($85.3bn), and becoming the largest ICT security on the NSE. The success of the firm was largely consolidated by launching two additional, high-profile cloud products: SMERP, an enterprise resource planning application for SME’s on a subscription basis, and the ‘Diamond Yello Account’, in conjunction with MTN and Ericsson, that allows the 57 million MTN subscribers to be mobile money enabled.

Smaller enterprises are globally acknowledged as the oil required to lubricate the engine of socio-economic transformation

Such growth is expected to continue now that Nigeria is considered the largest economy in Africa, with a GDP of $510bn. In particular, the services sector is the most significant contributor, with about 53 percent of GDP and ICT telecoms accounting for eight percent, and targeted to grow to $50bn by 2015.

This is largely driven by the development of an undersea fibre optic network; favourable demographics; a booming telecom industry; inclusive growth pushing SMEs and large corporations efficiency demands; privatisation of the Nigerian power industry and cashless initiatives. These drivers will create opportunities in business process outsourcing, cloud computing, IT services, and enterprise communication and resource systems.

“The major trend in driving cost effectiveness is for industries to stick to their core knitting and outsource their non-core functions, especially IT. We see a significant shift to cloud computing on a subscription model. This is why we took the decision to take our company to the cloud as far back as 2010. We have since honed our craft and are set to become the leading cloud company in Africa by 2015. We believe that the biggest growth shall come from Sub-Saharan Africa, fuelled by the higher returns on investment, and the significant commitment of resources by governments to upgrade infrastructure,” says Okere, looking ahead.

In this respect, the development of strong MSMEs in Africa is allowing for companies like CWG to take advantage of growing technology demands and create value for customers, as well as generate additional sustainable revenue streams.

BC Partners buys PetSmart for $8.7bn

Posted on by Ashton Wenborn

Investors led by London-based private equity firm BC Partners have acquired Phoenix-based retailer PetSmart for $8.7bn, in a last-minute move to outbid front-runners Apollo Global Management. The deal marks the end of an auction process that has lasted weeks and seen bids made from Kohlberg Kravis Roberts & Co. and Clayton Dubilier & Rice.

BC Partners, former owner of major UK brands Foxtons and Phones4U, will pay $83 per share for PetSmart

BC Partners, former owner of major UK brands Foxtons and Phones4U, will pay $83 per share for PetSmart, according to a press release – a whopping 46.2 percent mark-up from May this year, before the option of acquisition was being explored. PetSmart employs 54,000 employees in 1,387 stores across the US, Canada and Puerto Rico, and last month, it reported third-quarter net income of $92.2m and a sales rise of 2.6 percent, to $1.7bn.

Investors Longview Asset Management and activist fund Jana Partners, the latter of which bought a stake in the company earlier this year, had been pushing for a sale as the company struggles against increased competition from larger-scale retailers, namely Amazon and Wal-Mart. Jana Partners had allegedly threatened to overthrow management and elect its own board of directors if the deal was deemed unsatisfactory; an unlikely move now, considering the closing price.

“We are pleased to have reached this agreement with BC Partners, which maximizes value for all of our shareholders and best positions PetSmart to continue to meet the needs of pet parents,” read a statement from Gregory P. Josefowicz, chairman of PetSmart, within the release. “This transaction represents the successful conclusion of our extensive review of strategic alternatives.”

In a year defined by huge mergers, this is the biggest private equity deal announced globally in 2014, eclipsing Blackstone’s acquisition of Gates Global for $5.4bn in June by a long shot.

AEC launch opens insurance opportunities in the pan-Asian market

Posted on by Ashton Wenborn

The launch of the ASEAN Economic Community is finally upon us. At the end of next year, 15 of South East Asia’s most prominent economies will band together as key trading partners in a move unprecedented in the region. This, of course, will open many doors for industrial development, and there is no exception for the insurance industry.

Viriyah Insurance is already a market behemoth in its native Thailand, and, with the launch of the AEC, it is poised to take the next step into the wider world of the pan-Asian insurance market. Pravit Suksantisuwan, Deputy Managing Director at Viriyah Insurance PCL, spoke to us about the challenges and opportunities this burgeoning market will offer insurance companies across the region.

What are the biggest opportunities in the Thai non-life insurance market?
The upcoming launch of the ASEAN Economic Community in the region opens up more significant opportunities for the Thai non-life insurance industry. Insurance companies will benefit from the opening of markets in many countries, especially those that have competences and readiness. The overall population of AEC countries is currently around 600 million people, which makes it the third largest population in Asia, after China and India, and a whopping nine percent of the global population. It is one of the world’s large economic groups, with 2.4 percent of the world’s GDP. These offer many positive factors for non-life insurance companies in the region. The leading countries in the region are Singapore, Malaysia, and Thailand. In 2013, the non-life insurance industry in Thailand gained about THB200bn (around $6.25bn, see Fig. 1). It is expected to grow much more after the opening of the AEC in 2015.

Value of Thai non-life insurance
Source: Viriyah Insurnce

In 2013, comparing among insurance companies in ASEAN in terms of premium size, Singapore, with its 37 insurance companies, gained premiums worth about TBH300bn. Thailand, with its 65 insurance companies (see Fig. 2), gained about TBH160bn. Indonesia, with 84 insurance companies, gained TBH150bn. Geographically, Thailand is located in the middle of the ASEAN countries, which is a major advantage in terms of transportation.

Have the auto and industrial markets suffered this year, as was predicted?
As a consequence of the government’s tax refund for purchasing cars in the year 2013, the total number of cars sold for the first two quarters of 2014 has declined as much as 40 percent when compared to the year before. The business forecast indicates the total number of cars sold will have a total decline rate of 30 percent for a one year period. Thailand’s economy is returning to normal after a prolonged political incident during the first half of the year. Thus, without unexpected natural disasters, economic and political crisis, the premiums of the motor insurance business will likely return to normal growth.

What are the key trends facing the market?
Developing quality of service in underwriting and claims to gain more efficiency and effectiveness in order to serve all customer needs in a timely fashion is definitely a major factor most insurance businesses care about. This can also be used as a strategic business policy to gain more customers and ensure high satisfaction. Since customers are looking for high returns on their investment, they will absolutely renew or buy more insurance policies. Furthermore, they will talk to their friends or family members about the good experiences they have.

The coming AEC in 2015… has been a hot issue and insurance businesses of all sizes have been working on their business assessment and development

Insurance renewal rate is another key area where insurance businesses have been competing. Due to the decreasing rate of newly registered vehicles in the market because of negative economic factors, the political situation in Thailand and the high level of purchasing in the previous year – due to a benefit from the government – the sales of all passenger vehicles have dropped compared with last year’s sales. This definitely leads to declining revenue of insurance businesses, especially for those who focus on auto insurance. All insurance companies certainly need to retain all existing customers as best as they can.

Moreover, all insurance businesses will need to prepare for the coming AEC in 2015. This has been a hot issue and insurance businesses of all sizes have been working on their business assessment and development: training and providing more skills for their employees, developing more competitive products and expanding their network to serve their customers in all areas.

As the economy continues to grow and develop, the new government continues to lay down well-defined goals, and AEC opportunities: the insurance business in Thailand is expected to steadily expand for the next three years. However, should any adverse situations arise – such as disasters or uncertain political situations – there could be more challenges for insurance businesses in the Thai market.

Why should foreign investors be looking at these opportunities?
Because the penetration rate of non-life insurance in Thailand is still low, it has a very high potential for growth. After the great flood in Thailand in 2012, the consumer interest in buying insurance has increased exponentially due to knowledge and a better understanding of the gains from having insurance coverage for their property.

The AEC

600m

Combined population

9%

of the world’s population

2.4%

of the world’s GDP

The government also continuously promotes and supports insurance businesses and a variety of insurance policies. These projects include microinsurance (which focuses mainly on low-wage consumers), the Insurance Bureau System (which acts as an insurance-related information centre to help insurance-related businesses improve their efficiencies).

E-Claim offers an internet gateway and online payment system. There’s been a transformation of buying and selling insurance coverage from conventional methods to doing it online. Purchasing motor compulsory insurance policy online is an example for that. Furthermore, lots of reports are in real-time, to efficiently improve information systems and serve people in Thai communities more effectively. Foreign investors are able to support and stimulate the growth of non-life insurance by providing useful information, new innovations, new technologies and new management systems. Experiences, such as how to systematically analyse and manage various risks, and new innovations in compensation managements and claims, will help strengthen the stable growth of Thai non-life insurance industry.

How are your products different to those of your competitors?
Currently, both life insurance and non-life insurance products are limited within the tariff system regulated by the Office of Insurance Commission. As a result, the company is unable to improve, create or provide a wider range of coverage for consumers, but instead focuses mainly on after-sale services (compensation services). By focusing mainly on customer service, Viriyah Insurance has been well known for a long period of time. We are the best non-life insurance company in the country. We have the most efficient compensation service system, which covers 77 provinces around the country. We offer many services such as accident inspection services and repair centres.

Thai non-life insurance market share 2013
Source: Viriyah Insurance

What plans does Viriyah have to expand into new regions?
We see a lot of opportunities and beneficial gains from the ASEAN Economic Community. As a result, we have formed a partnership with insurance companies from countries participating in the AEC community, in the form of Co Sign. We have partnered with Allianz General Laos – the largest insurance company in Laos – to expand our Carrier’s Liability Insurance and insurance coverage for cross-border commercial vehicles between Thailand and Laos. The coverage will be expanded to cover the customers of people and businesses in the AEC mainland (including Malaysia, Singapore, Vietnam, and China) in the near future.

Currently, we are negotiating with major insurance companies in Malaysia to conduct co-insurance of life insurance and non-life insurance in the Malaysian market. We believe that, by being the best, the largest, best-known and highly trusted insurance company in Thailand – combined with exceptional expertise in companies’ stability and compensation service systems – Viriyah Insurance will have a better chance of gaining many advantages and opportunities from the ASEAN Economic Community.

Fortunately, Thailand is geographically beneficial when compared to other countries in the AEC. As a result, Thailand will act as a logistics hub for imports and exports in the East-West Economic Corridor. We have planned insurance policies for in-land transportation that would cover most personal and commercial vehicles that need to travel throughout Myanmar, Laos, Malaysia, Singapore, Vietnam and China. The company is developing products to support Thailand’s role as a logistic hub for the AEC. For instance, there are travel insurance, accident insurance, and health insurance products.

Unemployment special: Australia’s future looks bleak as mining boom ends

Posted on by Ashton Wenborn

Despite somehow weathering the great global recession of 2008 with very little damage incurred, fast forward to late 2014, and the Australian economy’s gold streak is well and truly over. The mining investment boom, which lasted a decade and contributed 13 percent to real per capita household disposable income per year since 2002, has come to its inevitable bitter end, and other industries have been slow to fill the gaping hole it’s left in the economy. An RBA report released in August found that without the mining boom, Australia’s unemployment rate would have risen by 0.75 percent during the global financial crisis, which suggests dark times could be ahead for the nation in its absence.

Hollande

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Unemployment special: can France escape a vicious circle?

Slowing growth in China has had a detrimental long-term impact on commodity prices, most notably coal and iron ore, the latter of which has fallen by over 40 percent in just one year. This has contributed further to the loss of resource-related roles as firms experiencing a decline in profits seek to cut costs in other areas. And lower-than-expected growth in 2014 has set a disheartening precedent for 2015, with the IMF predicting that growth won’t exceed three percent for the next five years. The Australian economy’s downturn comes in the midst of its major transformation, as the main driver of activity shifts from investment in resources projects to a broader variety of non-resource based sectors.

Sitting at 6.2 percent in October, Australia’s unemployment rate is set to be the second-worst in the Asia-Pacific region over the next two years with only the Philippines lagging behind; a heightened concern when considering the amount of significantly less developed, emerging economies in this region. 2014 has seen the rate reach a 12-year high of 6.4 percent, and in 2015, the IMF predicts a reduction of just 0.1 percent, while the Philippines’ is predicted to fall from 6.9 to 6.8 percent.

In such a fragile global and domestic climate, employers have been understandably reluctant to hire. And although the Australian working population is dwindling as the baby boomers reach retirement, this does seem to be picking up: the participation rate climbed 0.1 percent in November to 64.7 percent, somewhat offsetting the employment rate, which climbed to 6.26 percent. A high rate of joblessness has led to a deceleration of wage growth, which has then in turn helped to control inflation.

In July, the Reserve Bank of Australia (RBA) said employment was likely to remain low “well into 2015,” picking up only very gradually over the next few years. The RBA’s assistant governor Christopher Kent anticipates some progress in late 2015, when GDP growth should eventually pick up to an above-trend pace. Although many anticipated interest rates to remain at a record low of 2.5 percent, where it has been for 16 months, further joblessness growth in recent months suggests the RBA may be inclined to reassess.

Unemployment data is distorted somewhat by the fact that it doesn’t take the under-employed – those in a part-time or casual position, who would prefer to be in full-time work – into account. And as in most cases, the slump is felt most tangibly among young people, where the joblessness rate climbs to over 14 percent, topping 28 percent in certain regions. The pool of entry-level jobs is diminishing fast, and if employment is achieved, the role is likely to be casual, temporary or part-time, and therefore less likely to offer opportunities to progress. A September 2014 report by the Brotherhood of St Laurence warns of today’s youth becoming a “lost generation” if drastic action is not taken soon.

Prime minister Tony Abbott has put forward various schemes as solutions, for example, making the government’s Work for the Dole programme compulsory for all unemployed people – which will in fact come into effect on 1 July 2015. Or, insisting that jobseekers must apply for 40 jobs per month before they can receive the meagre Newstart allowance. However many of these schemes, including the 40-application quota, have largely been met with a chorus of criticism for how they punish the jobless without solving the fundamental issue of a lack of jobs. The government has also set aside $500,000 to pilot an education scheme which would see more vocational and technical subjects made available to students alongside the standard high school curriculum.

If a new sector doesn’t step up to the plate and fill mining’s boots soon, the Australian economy is at a heightened risk of falling into recession. Steps must be taken in 2015 to open up more roles, particularly for young people, or the “lost generation” could become a reality in the not so distant future.

Globalvia on the future of infrastructure investments

Posted on by Ashton Wenborn

In the wake of the 2008 financial crisis, infrastructure development by governments was put on hold as their coffers were spent on emergency responsiveness. Now, as markets open and governments start spending, Perez Fortea – CEO of global infrastructure titan Globalvia – tells us about how the growing appetite for development is happening worldwide.

World Finance: Javier, as governments rebound from the crisis, can you tell me how much money is being allotted to infrastructure development?
Javier Perez Fortea: That depends on where we’re talking about. If we’re talking about Europe, there’s nothing; because basically governments have cut down spending, and there are very few infrastructure projects that make it all the way through the tender process.

Now if we talk about the US, that’s a different story. In the US they acknowledge that their infrastructure network is obsolete, and they’re taking the steps needed to get everything renewed, and all this investment into the country.

In the US they acknowledge that their infrastructure network is obsolete

They are doing this; and they announced it a couple of months ago by creating an infrastructure hub that will gather up all the know-how and all the best practices in the industry.

I had the opportunity to participate in the B20 meetings in Australia this summer; what came out of those meetings was some proposals that we were making to the G20 Prime Ministers for their meeting later on in November in Brisbane, Australia. And infrastructure is considered a tool to create jobs and a sustainable economy.

Again, one of the proposals that the B20 made for the G20 was precisely to create an international infrastructure hub, which would look over all the infrastructure projects that are needed all over the world; specifically in the developing economies.

World Finance: Excellent; now can you tell me about some of the examples of some of these recent projects that you’ve taken on?
Javier Perez Fortea: We’ve just finished construction and opened to traffic a highway in Mexico. It’s a highway in the corridor that connects Mexico City to the Gulf of Mexico. That was opened to traffic in September.

We also completed the construction of the subway in Malaga, a city in the south of Spain. And that was opened to traffic in late July.

These projects however were projects that were tendered and awarded prior to the crisis. The only countries that have been active during the crisis are emerging economies – for example, our shareholder FCC has just been awarded the subway in Lima, Peru. Or the subway in Saudi Arabia, in Riyadh. So there are major projects happening; but not in Europe, unfortunately.

World Finance: Now we know that institutional investor sentiment has been shifting in terms of allocating more capital towards these types of projects; tell me how have you benefited from the change in sentiment?
Javier Perez Fortea: It used to be in the past that the financing for these projects came from banks – obviously governments also, but lately we are seeing a lot of institutional investors coming in. We’re talking about pension funds, infrastructure funds.

We in particular, Globalvia in particular, has benefited from this appetite from these types of investors, because we have three funds that back our company. That’s OPI Trust from Canada, PGGM from Holland, and USS from the UK.

These funds are funding our investments, which has allowed us to grow in a moment where it was almost impossible to grow. Because you know, Spain is in the south of Europe; the south of Europe was hit by the crisis even worse than some other countries in Europe. And in spite of this, we had the firepower and were able to grow, thanks to the backing of these pension funds.

Basically, we are now probably the largest subway and tram investor and operator

So we are very glad that there are alternative sources of funds, and we think that companies like us are still very much needed in this infrastructure world. Because we’re the ones that are able to manage all the risks involved in transportation infrastructure projects.

World Finance: In light of this formidable marketplace, tell me; how much of it has influenced your ability to take on the Metro de Sevilla project?
Javier Perez Fortea: The Metro Sevilla is a great project for many reasons. But the main reason by which we decided to take it on was because it rounded off our curricula.

Basically, we are now probably the largest subway and tram investor and operator – because there are other larger operators, but we invest in the assets also.

So it has allowed us to be in the top of the world of operating subways and trams, which is allowing us to tender projects in Asia or in North America, or in Australia, for example, which we wouldn’t have been able to do prior to this.

World Finance: So tell me; what’s on the horizon for Globalvia?
Javier Perez Fortea: Three words: growth, growth, growth! We are hoping to keep investing with the backing of these pension funds that are behind us. And Globalvia is right now number two in the world by number of concessions that we operate; and we are hoping to make it all the way to number one, obviously, by investing very well and investing in very specific and transformational projects.

Not small projects, but large projects: always in the world of rail and road.

World Finance: Exciting times ahead; Javier, thank you so much for joining me today.
Javier Perez Fortea: Thank you.

The rise of the super-rich puts pressure on wealth management sector

Posted on by Ashton Wenborn

The wealthy are becoming increasingly rich (see Fig. 1) and the term millionaire has recently been dubbed obsolete as multi-millionaires or the ultra-wealthy continue to dominate rich lists. The new wealth standards are particularly common in emerging markets such as China and Russia, but also in developed countries such as the US.

This is putting pressure on the wealth management sector to rethink their products and services in order to match the demands and specifications of the super-rich. The growing amount of personal wealth has also spiked criteria for private banking clients, as more and more firms look to only take on the very wealthiest of customers.

Wealth managers and private banks have had to refocus their energies and businesses on emerging markets

Increasing figures
Interestingly, during the past 10 years, worldwide millionaire and multi-millionaire numbers have grown at vastly different rates, especially with the amount of those that are ultra-wealthy increasing. On a worldwide basis, millionaire numbers have grown by 58 percent during this period, while there are now 71 percent more multi-millionaires, according to a study from the wealth consultancy New World Wealth.

In particular, the higher growth of ultra high-net worth individuals can be put down to a number of factors, including a widening wealth gap at the top-end, a rising rate of conversion of millionaires into multi-millionaires and strong growth in countries that have a large number of ultra wealthy persons. This has been a particularly strong development in countries such as Russia and India, the study said.

Surprisingly, growth in multimillionaires hasn’t just been centred on major economies but in very high growth areas such as South America, which has seen the largest growth in multi-millionaires at 265 percent over the 10-year period. Other top performers include emerging markets such as Australasia and Africa, which have seen a surge in major wealth. According to New World Wealth, this is no surprise, as all the countries with more than 200 percent growth in multi-millionaires are emerging and includes key markets such as Russia, Brazil, China and Angola (see Fig. 2). A lot of this comes down to the 10 percent or above GDP growth percentage that most of these countries have enjoyed in recent years.

With developed markets seeing less exponential growth in high wealth, wealth managers and private banks have had to refocus their energies and businesses on emerging markets. The surge in wealth has also lead to a shift in products and services as they’re increasingly geared towards ultra-high-net-worth individuals (UHNWIs).

HNWI Wealth chart
Source: Forbes

The death of the millionaire
To this end, the term millionaire or high-net worth individual may have become redundant as wealth providers are looking for new definitions for this group of individuals with net assets of $10m or more. In this respect, there’s little doubt that the richer are getting much richer.

This year’s annual CapGemini/RBC survey of investors worldwide showed the number of households with more than $1m in investable wealth rose almost 15 percent to 13.7 million in 2013. Shockingly, their total wealth rose almost 14 percent to $53trn. In essence, this means that both the ranks of the rich and their collective wealth have now risen 60 percent since 2008, according to the survey, and those fortunes are expected to rise a further 22 percent by 2016. For those in the wealth management industry, this presents new opportunities.

To a large extent private banks and wealth managers have rebranded to focus on the ultra-wealthy by changing their services and products to match the very specific needs of this segment and distinguish between the assets of a billionaires versus those who are affluent. With the finance industry becoming increasingly oriented towards niche services, segment specialisation has been drawing in clients like never before and for firms, such client retention means sure-fire profit.

It has also meant an investment in new private client teams, with advisors dedicated to only a handful of clients, ensuring the best service available for the ultra-wealthy. That said – firms have kept such changes largely under wraps, not willing to divest any trade secrets as to how they’re drawing in and retaining extremely profitable clients.

14%

Growth in global HNWI wealth

$52.6trn

Record high achieved

UBS, one of the world’s largest banking groups, has largely focused on wealth management in recent years, rolling back less profitable divisions such as investment banking. In 2010 the bank started actively targeting affluent clients in emerging markets as Europe’s economic decline has continued to bring down wealth and growth in developed markets. As a result, Switzerland’s largest bank is currently boosting business with an inflow of ultra-wealthy families with at least $54m of investable assets, and is said to have a business relationship with as many as eight out of 10 billionaires in Asia. “We have a penetration of one in two billionaires in the world,” Chief Executive Officer Sergio Ermotti said in the bank’s announcement of second-quarter earnings this year. “In Asia, this was much deeper.”

Pretax earnings at the wealth-management division for customers outside the Americas rose 11 percent to 557 million francs, the company added today in a more detailed quarterly filing. That unit attracted $10.8bn in net new money, with emerging markets and the Asia-Pacific regions driving growth, and the most money coming from UHNWIs.

Similarly, German lender Deutsche Bank rid itself of its UK-based asset manager, Tilney, which focused on the mass affluent lower end of the wealth management market. With the decreasing number of millionaires in developed markets, Tilney saw its losses grow from $14.6m in 2011 to $15.6m in 2012, according to its annual report at the time. To a large extent, the loss was caused by a drop in its assets under management from $8.2bn to $7.7bn, lower fees from clients with smaller accounts, goodwill impairments and client redresses.

In this respect, the impact of compliance and regulatory costs has sent client costs through the roof, providing further incentive for firms to focus on ultra-rich clients. Deutsche has openly chosen to focus on the super-wealthy as it continues with a lengthy and broad restructuring of its underperforming asset and wealth management business.

So far, this has been a successful move as Deutsche Asset and Wealth Management has grown its profits from $902m in 2012, reaching $6.05bn by the end of 2013. This has partly been achieved through a mixture of cost cuts, staff reductions, bundling of investment platforms and closer collaboration with the group’s investment bank. However, some cost reductions have also been reinvested to expand the global business and, in particular, hiring senior advisers for a 30-strong ‘key client partners’ team that is exclusively dedicated to advise ultra-rich families in London.

UHNWI map
Source: World Wealth Report. Notes: 2014 figures

Billionaire worth
It’s no surprise that this focus on the higher end of the wealthy segment has paid off for major banks and wealth managers. The global UHNWI population currently counts 187,380 individuals with a combined wealth of $25.8trn and, curiously, a lot of this comes down to a surge in billionaires. Meaning that not only are millionaires becoming multi-millionaires, but the even richer are especially gaining. According to a recent report from Wealth-X, the world’s UHNWI population grew by 0.6 percent but the growth rate of the global billionaire population outstripped that growth rate by expanding at an impressive 9.4 percent.

Currently, there are 2,160 billionaires globally, representing the top 1.2 percent of the world’s UHNWI population, yet controlling a quarter of the total fortune attributable to the ultra wealthy. As such, every billionaire is on average worth $2.9bn each. In comparison, the lowest tier of the ultra-wealthy segment is represented by those worth $30m-$49m. Making up the largest group of the super rich it’s noticeable that they only amount to a combined fortune of $3.3trn.

[F]ocus on ultra-high net worth individuals is a convincing long-term strategy for those firms betting on high wealth management profits

With the combined wealth attributable to this segment shrinking gradually from year to year, as the eurozone crisis and a slowdown in emerging economies continues to hurt the mass-affluent, financial firms have done well to focus on the extremely rich, rather than the averagely rich. It has also become clear that the mass affluent tend to be more vulnerable to market fluctuations. In this respect, focus on ultra-high net worth individuals is a convincing long-term strategy for those firms betting on high wealth management profits.

With the highest growth in billionaires centred on Asia and emerging markets in general, it’s no surprise that more and more firms are also expanding their wealth management business in this region. By 2016, the Asian Pacific region is forecasted to account for 18.8 percent of world wealth, whereas North America will account for a marginally smaller 17.9 percent, despite the US typically boasting the largest number of UHNWIs in the world.

This is why Nordic banking group Nordea launched its first private client business in Singapore and why UBS has specifically focused its efforts on the Asian region. In this respect, wealth management has become a big earner for firms, and banks are hedging their bets on the safest option for profitable growth in years to come – the emerging super-rich.